Industrial growth at 10-year high

India’s industrial production, according to data released by the government on Friday, grew 11.3% in 2006-07, a 10-year high, on the back of an unexpected 12.9% acceleration in March, as the highest interest rates in five years failed to curb consumer spending. Economists were expecting the index of industrial production (IIP) to rise 10.4% in March.

The surge in industrial growth has triggered fears among some experts that the central bank, the Reserve Bank of India (RBI), may be prompted to again raise interest rates to further curb credit growth. However, another set of data released by the government on Friday said that wholesale inflation had fallen to 5.66% for the last week of April, a four-month low that reduces chances of RBI increasing interest rates.

“The spurt in IIP augurs well for (the fight against) inflation. Incremental capacity is likely to kick in across industries in the coming months and should add to the salutory impact on prices,” said ICICI Bank chief executive officer and managing director K.V. Kamath.

Experts said that industrial production would slow down in 2007-08 because some of the credit-tightening measures undertaken by the central bank would take time to kick in. “There is a lag between rising interest rates and its impact on industrial production,” said Sujan Hajra, chief economist at Anand Rathi Securities Ltd, a Mumbai brokerage.

Data released by the ministry of statistics and programme implementation show that the manufacturing sector, which has the highest weight, 79.36%, in the IIP, grew by 14% in March, pushing annual growth in the sector to 12.3%, the highest since 1995-96.

The high industrial growth improves chances of the government meeting its targeted growth of 9.2% in gross domestic product, or the national income, in 2006-07.

Experts had been busy revising their growth estimates down to 8.5% or less.

Data for the the fourth quarter will be announced on 31 May.

Some industry analysts such as JP Morgan Chase Bank’s Rajeev Malik, stunned by the unexpected rise in IIP, are already calling it an aberration. However, the performance of the use-based groups of industries shows that the growth has been primarily investment-driven.

A 17.7% growth in capital goods, or machinery and equipment, in 2006-07, on top of a 15.8% growth in 2005-06, suggests that industrial expansion is set to continue, even if the pace may slow down marginally later.

“Growth is getting more tilted in favour of investment. It is now an important driver of the economy.

Also, this sector is yet to feel the impact of tight monetary policy,” said Dharmakirti Joshi, principal economist at credit rating firm Crisil. Finance minister P. Chidambaram has already indicated that investment growth may have already crossed 35% in 2006-07.

Barring September-October 2006, growth in the capital goods sector growth has been in double digits, said Devendra Pant, director, Fitch Ratings, another credit rating firm. “Another indicator for sustained industrial growth is the turnaround in growth of basic and intermediate goods, where growth went up from 6.7% and 2.5% in 2005-06 to 10.2% and 11.7% (in 2006-07). This implies that industrial activity continues briskly,” he added.

A closer look at the data reveals distinct signs of a slowdown in credit and inflation-sensitive sectors such as consumer goods.

Production of durables, essentially consumer appliances and consumer electronic products has steadily grown slower from 6.8% in January to 1.6% in February and 2% in March, bringing down annual growth to 9% compared with 15.3% in 2005-06.

“Data does show that the interest rates hike is impacting some sectors, particularly durables, where the growth has dramatically slipped to 2.7% in March from 21% (last March). This is supported by the evidence of a slowdown in automobiles,” said Crisil’s Joshi.

According to Morgan Stanley economist Chetan Ahya, sales of trucks slowed to 9.4% in April from 13% in March, while sales of both passenger cars and bikes remained weak.

The strong dip in durables was partly offset by an 18.5% growth in March in consumer non-durables, such as cosmetics and clothing.

The data comes in the backdrop of fears that the Indian economy is overheating. Last month, Moody’s Investors Service said India’s $854 billion economy (Rs35 lakh crore) was showing “classic signs of overheating” including higher than acceptable inflation and rapid rupee appreciation driven mainly by strong capital flows.

Delhi School of Economics professor N.R. Bhanumurthy said he expects “a general moderation” to 9% average industrial output growth in the current year. “The past global slowdown is transmitting into the economy with a lag and global cycles will affect domestic output and exports,” he added.

RBI on 24 April forecast economic growth to slow to 8.5% in 2007-08.

China’s economy is expected to expand 10% this year, according to the International Monetary Fund.

Crisil expects the Indian economy to grow by between 8.4% and 9.1% in 2007-08, while Fitch’s Pant said that he expects growth to slow down in even the services sector to 9% because of the rising rupee.